Previously, we covered the mortgage loan document checklist for the regularly employed joe, like me.
In reality, not everyone takes on regular employment whereas some pursue the dream of being a self-employed person, giving up a steady consistent monthly income that puts you in a challenging position when it comes to the mortgage loan application.
So what is a self-employed person?
Typically, a self-employed person is an individual who earns their living by working for themselves as opposed to working for a company or an employer. These individuals are independent contractors, sole proprietors or in some form of partnership where the activity motive is profitability.
Is it difficult for a self-employed person to ask for mortgage loans?
Generally, banks tend to run stringent profile reviews of a self-employed person as compared to the employed person. The inconsistent job request leading to the fluctuating nature of income makes self-employed persons highly susceptible to scrutiny during a mortgage loan application.
Case in point, real estate agents do not earn a consistent income and their living is dependent on their ability to close sales. In a year, there will be low months and high months and commission is expected to fluctuate from month to month.
Hence, a real estate agent who recently joined ranks in the industry finds it difficult to borrow money from banks relying solely on their sales commission.
Having said that, it is not impossible for a self-employed person to apply for a mortgage loan and that is what we intend to explore today!
The documents you should prepare for a mortgage loan application depends on the type of employment and entity applying for the loan,
- Full-time employment
- Self-employed person
Also, if you are reading my blog for the first time, this article is part of the mortgage loan series where I’ve previously covered a few topics relevant to the mortgage loan. Do check them out if this article has been helpful as we explore the nuances of mortgage loans.
- Basic Term Loan, Semi-Flexi Loan, Full-Flexi Loan: which one should I go for?
- The 10 Common Term you should know before signing a mortgage loan offer
- Step by step guide on applying for a mortgage loan in Malaysia
Let us begin!
Documents a self-employed person should prepare for a mortgage loan application
In general, getting a mortgage loan approval for the self-employed person can be more challenging due to the lack of consistent month-to-month income. Being able to prove your income stability with proper documentation and other qualifying criteria will improve your loan approval chances.
The mortgage loan application process for the self-employed is the same as any other homebuyers. During the loan application process, banks will review your application based on your credit history, credit score, earnings and debt-to-service ratio (DSR).
The only distinction between the self-employed person and the regularly employed person is the irregular income and lack of consistency that worries most banks.
Hence, banks will require you to submit a complete record of your cash flow and commission to ensure you have a history of financial strength and that you are able to generate a good income in the future – not likely to default on your loan payments.
So what are the documents I need for a mortgage loan application as a self-employed person?
- Copy of Identification Card (MyKad)
- Company Registration Form (Form 24, Form 49 and relevant documents)
- Latest financial statements (records of past years’ income, balance sheet, profit and loss statement)
- Income tax statements
- Latest EPF statement
- Latest Bank statement
- Credit score report (CCRIS and CTOS report)
- Savings and Investment statements
1. Copy of Identification Card (MyKad)
When it comes to mortgage loan applications, a copy of the identification card is the default document required by banks for identity checks. Once they’ve established your identity, the bank will cross-check your document and financial situation with their internal system and the government’s system.
2. Company Registration Form or Appointment Letter
If you declare to the bank that you run a business, then you better have the relevant SSM company registration form to back up your claims.
According to Suruhanjaya Syarikat Malaysia (SSM), any type of business requires official company registration documents to prove the nature of business, owners and partners. Any changes to the business details will need to be registered within thirty (30) days from the date of changes.
If you do not have any company registration form, then the business you run is technically illegal and unlawful in the eyes of the Malaysian government. Hence, it is impossible to prove any financial stability with the banks during the mortgage loan application process.
Fun fact about banks, different banks in Malaysia has their “personal” preferences when it comes to the type of business nature. For example, at the time of writing, there is a number of banks that do not prefer loan applicants from the Oil and Gas Industry due to the volatility of oil prices.
So if your business nature falls under the unfavourable category with the said bank, don’t give up and move on to the next bank.
What about the real estate agents who do not run their own realtor firms?
For self-employed persons in the business of earning sales commission, a letter of appointment is commonly issued by the agency indicating your association with the said agency. This letter of appointment is sufficient evidence to provide background on how you earn a living.
One thing to note, the letter of appointment is merely a document shown to the bank that you do earn a living from sales commission with agency XYZ, representing their products.
However, the letter of appointment is not enough to prove your financial stability as most commission earners do not have a consistent income from month to month. That is why it is important to have a good record of all your commissions earned and expenses that go into the business.
3. Latest Financial Statements
As a self-employed person, it is one thing to know for yourself that you are financially stable, another to be able to prove through properly organized records that you are financially stable.
That is why it is important to have a properly organized financial record of the following statements,
- Financial record of previous years’ income
- Balance sheet (showing asset and liability)
- Profit and loss statement (operational profitability of the business)
When you submit these documents for a mortgage loan application, the bank will go through these documents to understand how much income is your company generating.
When it comes to reviewing a company’s revenue, banks prefer companies with higher turnover or revenue. This shows the growth and financial strength of the company and it gives the banks confidence when it comes to lending out money.
As much as you can, avoid using cash transactions so that every transaction is properly recorded as an income. To most banks, cash transactions are non-trackable and are deemed an unverifiable source of income.
If cash transaction is inevitable for your business, do not worry. It is advisable to have a current account for the business and has those cash deposited into the same account.
On top of that, it is important to manage your income tax and have proper documentation of it.
What if I earn commission and have expenses relevant to the business?
If you are a commission earner such as a real estate agent and insurance agent, my recommendation for you is to have a good record of all your commission earned in the last 12 months.
Similar to the variable income as mentioned in the previous article for employed individuals, banks will look at your average earning over a period of time and take that as an estimate for your average earning.
The best time for a commission earner to apply for a mortgage loan is when they have had consistent income in the past 6 months and is earning their best income. This will boost the bank’s confidence in your earning capability and your chance of getting a favourable mortgage loan is higher.
4. Income Tax Statements
If you are self-employed and you have not declared any earnings to the Inland Revenue Board in the past 3 years, my suggestion to you is to start planning on your tax filing.
Having 3 years of income tax statement is helpful in convincing banks during a mortgage loan application. It indicates that your annual earnings after expenses are healthy and you are in a strong financial position to acquire a real estate asset. This puts you in a favourable position with the banks.
If you need some quick guidance on declaring your income, you may refer to these links on how to fill for a B Form Income Tax.
Let me be the responsible writer and remind you that you will be penalised with fines, imprisonment, or both if you are caught evading tax.
Simply put, Don’t Evade Tax Lahh..
It doesn’t help to be fined and at the same time miss out on the opportunities to buy some lovely real estate assets. That is why all self-employed individuals should plan their tax filings.
5. EPF Statements
As a self-employed individual, it is not compulsory to have an EPF statement when applying for a mortgage loan. However, having an EPF account with regular contribution indicates a stable source of income and that improves the bank’s perspective on your financial situation.
On top of that, did you know that the returns from EPF investments have been consistently beating the fixed deposit returns? So if you have a bunch of cash that you know you will not be using, one easy way is to dump them into your EPF account.
According to EPF’s website, you contribute a maximum of RM60,000 additionally every year.
If you are more aggressive in your long-term investment (like me), then you can opt for ETFs that mimic the stock market.
6. Latest Bank statement
When submitting the bank statement for a mortgage loan application, you should submit the statement that reflects all your commission earned. This will be used by the banks to cross-check the commission record and the expenses you’ve made.
If you do not have a bank account for your business, it is highly important that you set up an account specifically catering to the business. This bank account should not be mixed with personal expenses, allowing a clear distinction between the company account and personal account.
If you earn a living off sales commission, then you should utilize one of the personal bank accounts as the dedicated business account. Any credit and debit into the account should be solely related to the business.
7. Credit Score Report
The credit score is a 3-digit numerical system that represents your creditworthiness. It helps lenders such as banking institutions decide whether you get a mortgage loan, credit card or personal loan. Simply put, it helps banks understand your payment habit and the risk of lending you money.
Credit score should matter to you as much as it matters to the employed individual. Having a good credit score between 650 to 750 will make you an attractive borrower and you are likely to be offered better interest rates.
For your information, banks will typically refer to popular credit reports such as CCRIS and CTOS to help them understand your payment habits and credit rating.
If you do not have a good credit rating at present, the easiest (but does take time) way is to pay your credit card balance on time. Also, always be sure to not max out your credit limit.
8. Savings and Investments
When it comes to declaring the amount of savings and investments you have at hand, the intention is to show the banks that you do have a financial buffer to weather through tough times. Indicating your business’ financial strength and readiness to challenge some of the toughest business periods.
In my personal opinion, there is no need to show all of your savings and investments to the bank. If you are able to show a savings account with a year’s worth of salary, that should be more than sufficient to prove your financial stability.
Final Words
Thank you so much for reading this article. I hope the information shared through my writing has been helpful in your journey in building your investment portfolio.
Until the next article, take care and stay safe.
